With earnings dominating many markets, attention won’t focus on economic issues until Friday when Federal Reserve chair Janet Yellen addresses the annual Jackson Hole conference in the US which is hosted by the Kansas City Federal Reserve which sees major central bankers and others from around the globe meet for two days of discussions, speeches and networking.
Also speaking is the head of the European Central Bank, Mario Draghi. The seminar this year is entitled “Fostering a Dynamic Global Economy”, but Ms Yellen will be speaking on “Financial Stability.” The program isn’t being released until August 24.
Some economists say the topic of financial stability is an odd one for Ms Yellen to focus on given the intense interest on the Fed’s next move on interest rates and the unwinding of its balance sheet. Both are expected this year.
The next Fed meeting is not until mid September (September 19 and 20 or three weeks away on Friday) which will produce new economic forecasts and the usual quarterly media conference. That would give Ms Yellen enough leeway to start preparing the market for a change – just as her predecessor, Ben Bernanke did on several occasions in speeches at the Jackson Hole conference.
Mrs Yellen speaks at 10 am US east coast Time on Friday (midnight Sydney time), so the week could finish with a bit of a bang. Mario Draghi’s comments will attract just as much attention given the eurozone economy is solid and still growing to the point where markets expect the ECB to start giving a schedule to unwind its hue quantitative spending campaign.
The big conundrum across the developed world is the failure of inflation to accelerate as jobs growth has risen and economic growth settled back into a comfortable growth zone. If anything inflation is still weak in many economies and the ’transitory’ description of price growth heard earlier this year from Ms Yellen and the Fed is no longer the case, weak price growth is now a fact.
Minutes of the July Federal Open Market Committee meeting released last week revealed division on weak inflation among Fed members.
One faction feels the continuing weak inflation is a reason to delay further rate increases but others believe the still loose financial conditions pose a risk the Fed needs to counter.
Some analysts point out that if Wall Street loses its belief in President Donald Trump and his tax cut story (looking extremely remote given the growing instability in the White House) then the markets will sell off, thereby taking away one argument for a rate rise – that the strong performance of Wall Street justifies a further tightening in monetary policy.
Two officials last week, including William Dudley (head of the New York Fed) who has previously taken a dovish approach on monetary policy, said the fact that financial conditions have recently eased despite Fed rate increases is a reason to keep plans to tighten policy in place.
Economists therefore suggest that the reason for the subject for Yellen’s Jackson Hole address of “Financial Stability’ indicates she may see concerns about the stability of markets if monetary policy remains expansive (and she may also point to the 10 years since the GFC for support and the lessons to be drawn from then and now).
But the central issue at the conference will be the lack of any classical reaction to rising employment and solid economic growth – inflation remains low and wages growth weak in many developed economics, such as Australia. That is the central policy question everywhere.
Elsewhere in the US, we will get home prices data tomorrow; business conditions survey results on Wednesday, new and existing home sales (Wednesday and Thursday) and durable goods orders (on Friday).
The US June 30 earnings season has almost exhausted itself – a few retailers such as Abercrombie and Fitch, Guess?, Dollar Tree, Burlington Stores, Tiffany, American Eagle, Lowes Cos, JCrew and Williams Sonoma are expected to report.
In the Eurozone the usual August business conditions surveys on Wednesday will show the euro economy in particular is still doing well, with the rest of the EU chipping in.
In the UK we get the second estimate of second quarter GDP, while the final estimate of Germany second quarter GDP will be out on Friday.
Japanese inflation data for July on Friday is expected to show core inflation stuck at zero, still a long way from the Bank of Japan’s 2% target. But the economy is now enjoying its best growth spurt for years. But that is no reason for the BoJ to start thinking about ending its easy money policies.
In Australia it will be a quiet week on the data front but the focus will remain on the profit reporting season which will see its biggest week with around 100 major companies reporting.
